Platform governance in the face of negative network externalities: a moral and regulatory legitimacy perspective

When participants on transaction platforms harm others (e.g. fraud, misconduct), it typically takes time before platform sponsors tighten their membership conditions. Although anecdotal evidence exists, platform governance literature does not cover the microlevel processes through which negative network externalities lead to actions to protect the platform. This paper employs an institutional legitimacy lens to theorise how governance processes unfold as platforms encounter negative network externalities. We study PayNow, a payment platform whose governance practices evolved over time as legitimacy pressures accumulated, leading to progressively stricter onboarding and fraud-prevention measures. The study provides exploratory insights into microlevel processes of materialising and spotting externalities, perceiving legitimacy challenges, questioning internal assumptions, trading off legitimacy and growth, and safeguarding the platform. We contribute to platform governance literature by illustrating how governance actions are driven by moral and regulatory legitimacy challenges that stem from diverse forms of negative network externalities.